The cost of rebuilding Yugoslavia

BBC News Online, Friday, 6 October 2000, 12:48 GMT 13:48 UK

The US and Western Europe now pledge to lift sanctions, and promises
of aid are starting to pour in.

But experts are sceptical whether the unwieldy opposition coalition
can administer the economic medicine the country needs, and whether
its nationalist leader, Vojislav Kostunica, will accept the conditions
that come with Western cash.

End to sanctions

The US and the European Union are to lift sanctions against Yugoslavia
shortly, setting the country on its path towards economic normalcy.

It would mean an end to bans on trade with Yugoslavia and investments
in the country.

Part of the reason for Western willingness to offer an economic olive
branch to Yugoslavia is the hope that this will encourage democracy to
take root.

Stability pact

One of the biggest and most immediate sources of aid for the new
government is likely to come through the Balkans Stability Pact.

Set up after the Kosovo war in 1999, it co-ordinates aid from the
European Union and the G8 group of the world's top industrialised
nations plus Russia to the countries in the region.

Serbia had been excluded while President Milosevic was in power.

There are fears that Serbia's participation in the pact could
deprive other countries in the region from funds.

However, the co-ordinator of the aid programme, Bodo Hombach, has made
it clear that more funds will be available. Already, the US is said to
have pledged an extra $500m for Yugoslavia.

True reform

But for Yugoslavia to enjoy a true economic recovery, it needs to look
beyond Western aid.

Analysts say that the country must now consider structural reforms, as
the seeds of economic chaos in Yugoslavia were planted long before
sanctions were put in place.

It is difficult to gauge the impact the sanctions alone have had on
the Yugoslav economy.

Charles Robertson, an emerging Europe economist at ING Barings,
attributes the state of the Yugoslav economy less to sanctions but to
the “lack of structural reform [and] a lack of privatisation to
good investors”.

“I would imagine that the Yugoslav economic policy has been
tailored more to keeping Milosevic in power than insuring long term
stability,” he adds.

The break-up of Yugoslavia cut off Serbia's large manufacturing
sectors—which include autos and chemicals—from outlets and
suppliers.

Once trade with other European countries resumes, economic growth
should start to pick up.

Private help

Yugoslavia is also now likely to join other central and Eastern
European countries in looking to Western investors for cash.

But what are Yugoslavia's chances of attracting private
investments?

“This isn’t a huge economy. It is hard enough for major,
quickly reforming economies of central and Eastern Europe to attract
funds, it is going to be that much harder for a place like
Yugoslavia,” says Juliet Sampson, emerging market economist at
Bank of America in London.

And she adds: “The competition is fairly stiff.”

Private investors, who had their fingers burnt in the Russian crisis
of 1998, will need evidence of a genuine commitment to reform and even
more importantly, economic data they can trust.

“A lot of the real trade flows are not going to be recorded,
either because they are not legal, or because there hasn’t been
a real interest in giving an accurate portrait of what is going on in
the economy. Any data should probably be taken with a grain of
salt,” Ms Sampson added.

Multilateral medicine

If Yugoslavia chooses to follow the well-trodden route to reform, it
could also approach the World Bank and IMF for funds.

While the World Bank has programmes for structural aid that Yugoslavia
may wish to apply for, getting IMF funding may be more problematic.

“In economic terms is he [President Kostunica] the kind of
leader who would be willing to sign up to an IMF programme which in
practice means relinquishing some economic control and agreeing to
targets set by multilateral or external power?” Bank of
America's Ms Sampson asks.

A strong nationalist like President Kostunica might find the economic
medicine prescribed by the West hard to take.

“It might be in the interests of Yugoslavia to sell its banking
system to foreigners,” says ING Barings' Charles Robertson.

But he doubts that this is a policy Mr Kostunica would favour:
“This is an opposition movement, united only in its attempt to
get rid of Milosevic. When it come to making very hard economic
decisions, they will have real difficulties.”